In recent years, the various incentives undertaken to make housing loans affordable for first-time homebuyers boosted the growth in housing credits to 17-19% in FY 2019. With increasing affordability, the risks of defaulting on housing loan have also reduced significantly. However, even with these factors at play, it is important to make sure that you repay your loan well within time to avoid falling into a debt trap.
One of the best ways to minimise the risk of defaults is to prepay or foreclose your housing loan through higher EMIs. You can check the positive impact of prepaying your advance by using a calculator for home loan prepayment.
Note that during the initial months of your housing loan repayment, the interest component remains higher than the principal in your EMIs. As the loan tenure reduces, the principal amount becomes higher than the interest payable.
Advantages of prepaying your loan with a higher EMI amount
Following are some of the benefits you can avail when you prepay your housing credits through higher EMI amount –
Save on the amount of interest payable
The most important benefit of increasing your loan repayment amount is the amount of interest you save on it. When you pay a higher EMI, you can repay your amount within a shorter tenure and lower your interest. Thus, you can decrease your total loan interest amount.
You can use an online home loan prepayment calculator to know the amount you can save on EMI by choosing to prepay your advance.
Avail tax benefits
There are several tax benefits under Sections 80C, 24(b) and 80EEA of the Income Tax Act, 1961 that you can enjoy if you choose to prepay your loan through higher EMI amount. In most cases, borrowers fail to maximise the benefits of taxation offered under these sections due to lower amount of EMI availed. Thus, you can reduce your income tax liability if you choose to prepay your loan amount.
Improve your credit score
When you repay your loan faster, your credit score increases. Since about 35% of your credit score depends on your repayment capability, faster prepayment of home loan amount reflects positively on your CIBIL score.
However, there are a few things to consider before you foreclose or prepay your home loan.
Things to know before you decide to prepay your loan amount
Even though increasing your EMI amount to prepay your home loan can bring several advantages, you should be well informed about it to make sure that you do not incur any losses.
Following are the things you should know before you choose to prepay your loan amount –
Check the charges for prepayment
When you decide to prepay your loan, financial institutions levy certain charges. These charges may vary from one lender to another, and according to the type of interest you pay for the advance. Financial institutions like Bajaj Finserv do not charge any additional fees if your home loan is based on floating rate of interest.
Learn how to use a prepayment calculator
A home loan prepayment calculator is easy to use and can help you to calculate your savings. You will have to enter the following information to calculate your revised EMI amount and your total savings –
Total repayment tenure
Rate of interest
After entering these parameters, you will know the reduction in your tenure and EMI amount.
Lastly, make sure you calculate your monthly instalments with an EMI calculator if you are opting for one. This online tool will help you to plan your repayment more easily.